Changes coming to groceries, with or without Amazon-Whole Foods

Faye Algazzali (right), an owner of Gazzali’s Supermarket in East Oakland, rings up purchases for customer Jonell Walker.

Photo: Leah Millis, The Chronicle

The future is almost in the bag — even for this East Oakland supermarket that stands in a strip mall behind an Auto Zone.

“Our customers would always bring up: ‘Hey, do you guys deliver?’” said Rahban Algazzali, owner of Gazzali’s Supermarket, where about 2,200 customers circle in and out on an average day.

Algazzali would periodically look into setting up a delivery service for online shoppers, but he was discouraged by the costs: He would need a van, insurance, extra staff. But as Bay Area startups like Instacart and Postmates and competing services from Amazon and Google began making grocery deliveries seem routine, Algazzali eventually had to give in.

He had good timing. Shortly after he paid Indemand, a Bay Area startup serving small grocers, to build his online store and contract out the delivery work, Amazon bought Whole Foods for $13.7 billion — a deal that experts say will shake up a traditional industry and accelerate demand for online food shopping.

“With the nature of our lives right now, we’re all so busy that I hardly even go shopping anymore,” Algazzali said. Stores waiting to go online “are just wasting time. If we don’t offer online shopping to our customers, then they are gonna go shop somewhere else.”

Shifts in the industry matter because food shopping is central to our everyday lives. The grocery industry employs more than 3 million people in the U.S. and accounted for more than $660 billion in sales last year, according to the Food Marketing Institute. Nielsen projects that online grocery shopping will make up 20 percent of all U.S. grocery shopping by 2025, accounting for $100 billion in annual sales.

But experts expect that time frame to tighten as Amazon’s deal with Whole Foods hurtles the industry toward a future where everyone from conglomerates to the local butcher is expected to provide online delivery.

“We really see where the market is headed,” said Alex Saidani, CEO of Indemand. “Customer buying behavior is changing, and Millennials don’t necessarily want to go into the store. And if they do, they just want a better experience.”

Saidani said he is excited about the Amazon deal because it will encourage smaller retail stores — like Gazzali’s — to make the move online. Indemand caters to midsize independent and ethnic stores that he says are typically underserved when it comes to technology.

However, people have been attempting to master online grocery deliveries for two decades. The industry also comes with the cautionary tale of Webvan, an online grocery business that promised 30-minute delivery. Amazon backed a rival, HomeGrocer, which merged with Webvan in 2000; the combined company went bankrupt in 2001 after a lot of hype and rapid expansion.

Changes coming to groceries, with or without Amazon-Whole...

1of3Manager Wallace Miles stocks shelves at Gazzali’s in East Oakland. The market has recently added online ordering and delivery.Photo: Leah Millis, The Chronicle

2of3Summer Algazzali (right) an owner, helps co-worker and chef Daniel Jaramillo ring up some melons at Gazzali's Supermarket in East Oakland.Photo: Leah Millis, The Chronicle

3of3Faye Algazzali, an owner, checks a customer out at Gazzali’s Supermarket in East Oakland.Photo: Leah Millis, The Chronicle

“It was the highest-profile failure of the dot-com bust,” said Arun Sundararajan, a New York University business professor. He said Webvan made a number of mistakes, including its focus on suburban areas where drivers had to travel long distances between deliveries. For a while, www.webvan.com redirected to Amazon’s grocery website, but the domain now appears to be dead.

Today, the market is much different, Sundararajan said: “The excitement around the on-demand economy, coupled with the fact that everyone can be a delivery person because everyone has a smartphone,” changes the economics.

Amazon has been in the grocery delivery service for more than 10 years, yet has less than 1 percent of the grocery market. If the deal with Whole Foods is completed by the end of the year as planned, it will have 460 stores that can be both retail destinations and distribution centers.

News of the deal sent stocks for traditional grocery sellers like Kroger, Walmart and Costco tumbling, and put a spotlight on a sector that has been largely ignored.

“The grocery store segment has gone from being watched by a few nervous Nellies ... to just about everyone in the commercial real estate market,” according to a June report written by data analytics firm Trepp.

Amazon-Whole Foods will be a formidable competitor, experts said. That’s a mixed bag for startups, who may find themselves picking up new customers fearful of the Seattle giant. Companies like Instacart — whose workers pick up groceries for customers and deliver them to their doors — say they have already benefited through expanded partnerships with major retailers like Publix, Wegmans and CVS.

“This is absolutely a validation that grocery e-commerce is here to stay,” Nilam Ganenthiran, Instacart’s chief business officer, said in an email. “Every time Amazon comes to town, we hear from retailers who want help competing. Instacart is ready, willing and able to help, and we’re already seeing the effects.”

Analysts see Amazon-Whole Foods giving shoppers a range of choices — the ability to touch produce before they buy it, or tap an app and have it delivered.

But there is a cohort of companies that swear by the online-only model.

One of those is San Francisco’s Good Eggs, which delivers produce fresh from farms to customers’ homes. CEO Bentley Hall believes that if people trust the brand, they won’t feel a need to pick out fruits and vegetables themselves.

“The grocery industry is way too fragmented,” he said on a recent afternoon, walking up and down the aisles of the Good Eggs Hunters Point warehouse. He stopped and held up a vibrantly green bed of lettuce: “It all goes down to trust on great quality.”

Algazzali, on the other hand, has no plans to give up his brick-and-mortar locations in Oakland anytime soon. His stores cater to African American and Latino communities, and some customers travel dozens of miles for products they can’t easily find elsewhere.

But, he said, when his customers can’t get to the store, they have the option to get it — with the touch of a button.

Trisha Thadani is a City Hall reporter for The San Francisco Chronicle. She previously covered work-based immigration and local startups for the paper’s business section.

Thadani graduated from Boston University with a degree in journalism. Before joining The Chronicle, she held internships at The Boston Globe, USA Today, The Wall Street Journal, and was a Statehouse correspondent for the Worcester Telegram & Gazette.